Offshoring increases at faster pace, Forrester says

As U.S. businesses continue to stretch their capital-expenditure budgets, the pace at which they use offshore service providers is picking up, according to a report released Monday by market research company Forrester Research Inc.

Forrester predicts that the number of U.S. services jobs moving offshore by the end of 2005 will be 830,000, a 40 percent jump over its original forecast of 588,000 published 18 months ago. The types of services included in this number include both IT and non-IT jobs, according to the new report.

“User interest in offshore services continues to rise particularly on the IT side,” said Karyl Levinson, director of Forrester corporate communications, speaking on a conference call from the GigaWorld IT Forum conference in Orlando, Florida. “Companies are looking to stretch their flat or declining IT budgets and looking at offshore as a way of doing more with less, or the same amount.”

In terms of IT, the types of jobs that will be done offshore run the gamut from tasks directly related to computer technology, such as applications coding and management, to those that depend heavily on IT, such as call center, loan processing, back-office accounting and other business process outsourcing (BPO) jobs.

In the “computer” category, 181,000 jobs, cumulatively, will be moved offshore by the end of 2005, compared to 102,000 in 2003. This number will rise to 542,000 by 2015. Life sciences jobs being moved offshore will rise from 300 in 2003, to 4,000 in 2005 and 39,000 in 2015. In the “office” category, 146,000 jobs were moved offshore in 2003, a number expected to climb to 410,000 in 2005 and 1.6 million in 2015.

Not all IT-related jobs are in the computer category, noted Forrester Vice President John McCarthy, speaking in an interview after the conference call from Forrester headquarters in Cambridge, Massachusetts. Jobs in art and design and architecture include IT-related research and development, he said. He also noted that many tasks in the “office” category are related to BPO. Forrester did not provide a specific figure for all IT-related jobs.

Despite the updated forecast, there has been a spate of press reports about outsourcing deals gone bad, and articles about companies pulling back from offshore outsourcing, or “offshoring,” noted Forrester vice president Stephanie Moore, during the conference call.

“The articles on pullbacks have really been overstated,” she said. “To be sure, there have been problems but these have been really … glitches or hiccups” she said, adding that “problems are more related to internal lack of preparation. Some companies are not preparing themselves internally to manage the complex relationship with offshore vendors.”

Adding fuel to the offshore services fire is the fact that offshore vendors and U.S.- based services providers have added to non-U.S. facilities and services offerings, said Forrester analysts on the conference call. Leading Indian suppliers such as Satyam Computer Services Ltd., Wipro Ltd. and Infosys Technologies Ltd., have grown in terms of revenue and employees during the past year and a half, Forrester analysts said, allowing them to add to their portfolio of offerings. Meanwhile U.S. vendors such as IBM Corp., PeopleSoft Inc. and Accenture Ltd. in the last 18 months have added to non-U.S. operations not only in India, but in China and the Philippines as well, they said.

The other major factor in the growth of offshore services is that offshoring has become, essentially, a requirement of BPO, the analysts said. “BPO growth will inevitably propel the number (of jobs moving offshore) in terms of offshore growth,” said Forrester Vice President Bill Martorelli. “Offshore is booming and in the context of BPO (it is) highly inseparable.”

The Forrester analyst noted that in the long run, however, their forecast has not changed substantially from 18 months ago, mainly because after the increased rate at which offshore services will be used in the next few years, there will be a period of “digestion” according to Levinson. The Forrester forecast for total services jobs moving offshore in 2015 is now 3.4 million compared to a prediction of 3.3 million made 18 months ago.

Forrester’s methodology for its forecast was based on: trips to India by analysts; offshore “best practices” interviews with more than 100 companies; a baseline number update from the 2002 U.S. Bureau of Labor Statistics; 300 vendor briefings; and research with third-party sources.